Tuesday, July 07, 2009

Chris Edwards, an economist at the Cato Institute, reports that Tim Horton's (Canada's "Starbucks") is moving its headquarters to Ontario, as the provincial policymakers are cutting the federal-provincial corporate tax rate down to 25 percent (link). That is 15 percentage points lower than the federal corporate tax rate in the U.S.

World Economic Forum recently published its annual report on enabling trade around the world (link).

The report estimated broader openness to trade after taking all indicators, regulatory and administrative factors into account. Notably, among these are the ease of market access, customs administration, difficulty of export and import procedures, quality of transport infrastructure, the availibility of transport services and the use of ICT. The report found a positive and moderate correlation between the GDP per capita and enabling trade index. Thus, it implies that countries with higher GDP per capita, on average, tend to be more trade-friendly.

There are, of course, some other factors, aside from GDP per capita, that affect broader openness to trade. The research by the WEF found that the customs regulations, quality of regulatory and business environment and the quality of transport infrastructure and services significantly explain country's openness to trade flows fairly well.

Countries with the highest Enabling Trade Index (ETI) are Singapore, Hong Kong, Switzerland, Denmark and Sweden, followed by Canada, Norway, Finland, Austria and the Netherlands. In spite of robust growth of trade volume before the economic crisis, Russia ranks 109th out of 121 countries in the report, accompanied by countries such as Syria and Nepal. This suggests that Russia's growth of trade volume before the crisis can be assigned to its factor-driven economic growth. WEF's report reveals that Russia's score poorly in terms of border administration, market access and the business environment while performing modestly in terms of quality of transport infrastructure. Index of Economic Freedom noted that Russia's trade freedom is inhibited by the inefficient arbitrary customs administration. The latter restrains trade and is a popular protectionist policy measure. The least trade-friendly countries, according to the report, are: Chad, Cote d'Ivoire, Venezuela, Zimbabwe and Nigeria.

Monday, July 06, 2009

At Bloomberg, Kevin Hassett wrote an article (link), discussing the shortcomings of California's fiscal crisis. According to the official estimates, California's annual budget deficit is likely to hit $26 billion. Dan Mitchell recently debated California's spending disease on CNBC (link). In addition, high government spending has deteriorated California's economic growth prospects. California has become a textbook case of gradual economic stagnation. Back in 1960, California's GDP per capita stood 24.5 percent above the U.S average. In 2008, it stood 7.4 percent above the U.S average. In recent decade, California has pursued an economic policy based largely on government's meddling into economic affairs.

The data from California's Department of Finance (link) reveal the outcome of economic mismanagement. In California, minimum wage has been growing steadily with a fascinating rate. In 1957, the minimum wage rate stood at $1.0 per hour. In 2008, the minimum wage rate was $8.0 per hour. That is 800 percent increase. In 2008, the minimum wage rate in California was 10.35 percent above the U.S average. The economics of minimum wage is simple: as unions set the minimum wage above the non-union rate, the employment drops and union members enjoy a wage premium and more employment protection. Larry Summers, the chairman of National Economic Council, nicely summarized how minimum wages, welfare payments and unemployment insurance spur long-term unemployment (link).

The macroeconomic outlook of California is not favorable. Seasonally-adjusted unemployment rate in May 2009 stood at 11.5 percent compared to 9.4 percent of the U.S average. Second, California's record-breaking budget deficit is largely a result of high tax burden and high government spending. In 2009, California's government spending is projected to reach $417.3 billion or almost 25 percent of California's gross state product (GSP). The share of government spending in the GSP is likely to climb higher when the 2009 GDP data will be released. Time-series data on fiscal policy (link) show that California's gross public debt in 2009 is set to hit $367.7 billion or 21.63 percent of state's gross product. A study conducted by Arthur Laffer & Moore Econometrics (link) showed that California's 10.3 percent top personal income tax rate is the second highest in the U.S, just behind the state of New York.

Not surprisingly, the overall employment grew only by 1.4 percent. In Texas, one of the most vibrant and highest-growing economies in the U.S, the overall employment grew by 2.9 percent. That is 107 percent difference. California's tax policy has also taxed dividends and capital gains by 10.3 percent tax rate, thus discouraging capital formation.

If California were an independent state, it would be the 8th largest economy in the world. However, tax and spending fine-tuning left a disastrous fiscal legacy of high public debt, deep budget deficits and stagnation of employment, productivity and income growth. To stabilize California's public finance and boost state's economic growth, the remedy of fiscal policy would include a drastic reduction of government spending, the ending of budget deficit and the creation of surplus. In addition, tax rates that penalize savings, work and investment should be slashed radically. It should not be neglected that entitlement spending is a hampering burden to the economy and is ought to be anchored by an official fiscal target. If California's public finances and fiscal policy continue the status quo, then, in a couple of years, California's economy will resemble France more closely than ever before.

Saturday, July 04, 2009

"The ground of liberty is to be gained by inches, and we must be contented to secure what we can get from time to time and eternally press forward for what is yet to get. It takes time to persuade men to do even what is for their own good."